I could have turned £100 into £500 if I had bought into transport company FirstGroup (LSE: FGP) back in 2020 when there were questions about its ability to survive. Those risks were too high for my taste. But even if I had invested a year ago, I could have benefitted from the 60% growth in the FirstGroup share price over the past 12 months.
So, could the positive momentum be set to continue? Or ought I to avoid the shares for now?
Know what you invest in
When buying shares, price is only one part of the equation (although it is an important one).
The other one is the what.
What exactly am I buying into? Is it the sort of business I think has attractive long-term commercial prospects?
FirstGroup operates in a space I believe has attractive economic prospects. It operates a fifth of the country’s buses outside London and is the biggest rail operator in the country.
Demand for buses and trains is often (though not always, as we saw in the pandemic) resilient and fairly predictable. Often it is close to or actually is a monopoly – and may even be subsidised by government.
That said, my investment in rival Stagecoach turned out to be a poor one. It had a similar bus business to FirstGroup.
I see risks here too, from the possibility of regulatory intervention hurting profit margins to falling long-term demand for buses leading to lower revenues.
Performance has been improving
Still, as the soaring FirstGroup share price suggests, the company is in much better shape than it was several years back.
Revenues in the first half of its current financial year were basically flat compared to the prior year period. But adjusted profit before tax more than doubled to £71m.
The interim dividend grew by two-thirds.
On a statutory basis, though, the accounts for the period recorded a pre-tax loss of £68m.
While net debt fell it was still £1.1bn. Stripping out lease liabilities, the net debt was around £384m. I see that as manageable.
Is this a bargain?
There are some positive signs in those results.
But I do not think that I would currently describe FirstGroup as a brilliant business. After a tumultuous few years, it still look like it is in recovery mode.
That alone puts me off investing.
But even if I liked the company enough, the valuation does not look attractive to me. The current FirstGroup share price is 16 times last year’s earnings per share.
That looks pricey to me for a business that has demonstrated uneven performance, operates in a mature industry and has razor-thin profit margins. Last year’s net profit margin was under 2%.
I have my doubts that the share price can keep rising the way it has in recent years unless the business can massively grow its profits.
For now, in any case, it does not offer the right combination of business quality and attractive valuation to make me want to invest.
